EADS, BAE Systems Call Off Merger

The collapse of merger talks between EADS and BAE Systems raises serious questions about the future course of both companies and shows how much influence European governments have over EADS.

The two companies called off their planned merger Oct. 10, hours before the expiration of a deadline set by a British takeover commission. Executives mustered last-ditch efforts to save the deal, but it had become increasingly clear since late last week that political reservations could not be overcome.

The proposed transaction was announced four weeks ago and would have led to the creation of the world’s largest aerospace company, with annual sales of about $100 billion, far surpassing current market leader Boeing. The combined entity would have had a balanced portfolio of civil and defense business.

EADS now faces even stronger government influence than in the past. In Germany, Daimler confirmed Wednesday that it still plans to sell an initial part of its stake in EADS to the German government by year-end. In France, a 7.5% stake held by Lagardere Group has been for sale, and with the collapse of the merger, the government is again free to buy it.

Strategically, EADS will have to deal with a defense division that will remain weak in the near future, compared with its competitors, and Airbus will continue to be its main source of revenues and profits, but also risk.

Industry speculation to the contrary, BAE Systems CEO Ian King says the company has no plans to find another merger partner and expects no management changes.

Sources close to the negotiations say the deal failed because the German government blocked it. They add that it was difficult entering negotiations with the Germans, who provided little feedback to proposals that included far-reaching job guarantees and an important role for Germany as a site for part of the combined entity’s headquarters. Also, Germany would have been allowed to buy a stake of up to 9% in the merged entity.

“It is, of course, a pity we didn’t succeed, but I’m glad we tried,” EADS CEO Tom Enders says. “I’m sure there will be other challenges we’ll tackle together in the future. EADS will continue on its international growth path, and our shareholders can continue to expect profitable growth, excellent liquidity and program execution based on a strong order book.”

BAE’s King says he is “obviously disappointed.” He adds, however, that “our business remains strong and financially robust. We continue to see opportunities across our platforms and services offerings and in the various international markets in which we operate. We remain committed to delivering total shareholder value, including a progressive dividend policy, and look to the future with confidence.”

He also said BAE Systems was not prepared to do anything that would have compromised the prospects of its important U.S. business, indicating that concerns over government influence played a key role in the decision.

EADS and BAE Systems will not resume talks until the political landscape surrounding a possible deal has changed materially, King adds.

Both companies said it was not business logic that thwarted the transaction. Instead, “notwithstanding a great deal of constructive and professional engagement with the respective governments over recent weeks, it has become clear that the interests of the parties’ government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger,” the companies said.

Peter Hintze, the German aerospace coordinator, indirectly confirmed the reservations of the German government. “I believe that in this formation [EADS and BAE Systems remaining separate], Germany’s industrial policy interests to sustain a strong aerospace value chain from research to development and industrial production is served the best,” he says. Defense Minister Thomas de Maiziere noted EADS’ comments that Germany was responsible for the merger’s collapse, and added, “I don’t agree.”

U.K. Defense Minister Philip Hammond says it was “too difficult” when all the different interests had to be taken into account.

French President Francois Hollande says governments should not be considered responsible for the breakdown of talks. “That is a decision made by the companies.”

France and the U.K. appeared to be close to an agreement. Sources say France would have been prepared to limit its ownership in the company, a key prerequisite for the U.K. to approve the deal.